REIT Wars: ARCP vs. CCPT III

The war of words between American Realty Capital Properties and Cole Credit Property Trust III continues to get more heated with each side issuing statements detailing why their proposals about the future of CCPT III are best for stockholders.

The war of words between American Realty Capital Properties and Cole Credit Property Trust III continues to get more heated with each side issuing statements detailing why their proposals about the future of CCPT III are best for stockholders.

Today, ARCP reiterated its belief that its offer to buy CCPT III is better for stockholders and that the stockholders should have a say in the matter.

“None of Cole’s assertions can disguise the fact that ARCP’s proposal provides CCPT III stockholders with certainty of execution, timing and value in an 80 percent stock, 20 percent cash transaction,” ARCP fired back this morning. “CCPT III stockholders who elect to receive ARCP common stock will have unlimited upside and a floor of $12 per share (cash elections will receive $12 per share). This proposal represents at least a 20 percent premium to the original CCPT III offering price of $10 per share, with no lock-up and immediate liquidity for CCPT III stockholders.”

The Cole letter criticized ARCP for making its offer public only 12 hours after sending it to the CCPT III Board of Directors. It also stated that ARCP “attempted to mischaracterize a transformational transaction between CCPT III and Cole Holdings as an‘internalization.’

“The reality is that CCPT III will actually own a profitable, full-scale real estate investment management platform, with more than 350 employees, that currently manages more than 2,000 properties and more than 76 million square feet across 47 states,” the Cole Holdings officials said.

Cole and Nemer stated, “ARCP’s clear distortion of the facts for the purpose of interfering with and disrupting the efforts of their competitors is not surprising. Attempts to purposely create chaos and confusion in the marketplace for personal gain are simply inexcusable as everyone suffers – our broker-dealer clients, our investors and the industry-at-large.”

In today’s press release, ARCP denied that it went public after only giving CCPT III officials 12 hours to consider its offer. ARCP said its management had expressed interest in acquiring CCPT III numerous times over the past two months to Goldman Sachs, CCPT III’s financial advisor, and then directly to the board of directors and management. ARCP stated that no one connected with CCPT III had made an effort to communicate with its management or advisors to “thoroughly review, analyze or negotiate the ARCP proposal in the best interests of the CCPT III stockholders.”

One of the issues in dispute is Cole’s contention that CCPT III’s acquisition of Cole Holdings would be a transformational transaction while ARCP calls it an internalization. In its press release today, ARCP stated: “Cole asserts that its ‘transformational transaction’ (at a cost in excess of $120 million paid by CCPT III stockholders) will result in CCPT III owning a “profitable, full-scale real-estate investment management platform.” ARCP then wrote in bold print, “This is, in fact, the very definition of an internalization.”

ARCP went on to detail what it estimates CCPT III would receive upon a successful listing, stating it would be about $258 million, plus an “undeterminable earn out,” adding it would be a “transformational transaction” for Cole but not for its stockholders.

In its Thursday letter attacking the ARCP proposal, Cole and Nemer said ARCP omitted key facts, including that it’s privately owned external manager would be a primary beneficiary of the proposal. The two men stated reliance on an external management structure “is viewed unfavorably by the institutional public markets.” They claimed the ARCP external management team “has a mixed track record and no history with approximately 75 percent of the combined portfolio.”

The ARCP statement today addressed that assertion by saying there are successful examples of externally managed public companies, including REITs. ARCP pointed to its launch of a $70 million IPO as an externally managed REIT in September 2011 and added that it raised $134 million in follow-on and preferred offerings and executed a $3.1 billion merger.

The REIT went on to say that institutional markets have “embraced ARCP’s low-cost, external management structure, where acquisition and financing fees have been eliminated and asset management fees were structured to remain significantly below industry averages.”

ARCP added that the board of directors has the option to internalize management any time if there is a stockholder benefit.

Cole had listed several other reasons for rejecting the ARCP proposal including:

CCPT III has a “superior asset portfolio” and combing the two portfolios would be dilutive to CCPT III;

The cash component of the ARCP proposal would result from leveraging the CCPT III balance sheet, eventually leading to future dilution to the CCPPT III stockholders.

In today’s response, ARCP attacked those reasons point by point. It defended its “best-in-class” portfolio, noting it comprised 692 properties with 16.4 million square feet worth about $3.1 billion as of Feb. 28. ARCP said 79 percent of its 49 tenants were investment grade and that it was located in 44 states and Puerto Rico. Average remaining lease term is 11.5 years.

ARCP said it was offering a minimum 20 percent premium potential upside to the original CCPT III offering price of $10 per share. The REIT said the only thing that “defies financial logic” is the refusal by all the CCPT III parties to consider ARCP’s offer.

ARCP said it is one of the lowest leveraged REITs in the net lease sector. It also added its proposal would be fully funded and immediately available under ARCP’s existing credit facility which was recently expanded.